CHAPTER 1

Introduction
 Setting the scene
• How does financial management contribute to the success
of entities?
• What decisions would the financial manager make in
entities?
• What academic knowledge areas would the financial
manager refer to when making and effecting decisions?
• What is the role of the financial manager and what activities
could he or she be involved in within entities?
 Learning outcomes
Once you have worked through this chapter, you should be
able to do the following:
• Define what is meant by financial management.
• Describe how value is created in organisations and
outline the role of financial management
practitioners in creating this value.
• Explain the role of financial management
practitioners in an organisation.
• Describe the financial management process.
• Discuss the considerations that should be taken into
account when setting an organisation’s objectives.
• Discuss the decisions that form part of the financial
management of an organisation.
 Learning outcomes
Once you have worked through this chapter, you should be
able to do the following:
• Identify the academic knowledge areas that financial
management practitioners use to make decisions.
• Explain the internal and external factors that affect
financial management decisions.
 Introduction
Definitions
• Financial management is the effective and efficient
management of financial capital and resources in
order to help an organisation achieve its goals,
strategy and objectives.
• Financial capital refers to economic resources that
can be measured in monetary terms, and that
finance an organisation’s operations, investments
and stakeholder requirements.
• A financial plan describes the activities, resources,
equipment and materials needed to achieve an
organisation’s strategy and objectives, including the
period over which these activities and expenditures
occur.
 Value creation
Figure 1.1 The organisation’s value-creation life cycle (or value chain)
 The role of the financial
manager in creating value
• Planning: Developing a financial plan capable of ensuring
that the organisation achieves its goals, strategy and
objectives.
• Organising: Organising the financial resources needed to
implement management’s plans.
• Leading and motivating: This involves giving management
the information and guidance required to ensure that the
organisation’s resources are allocated optimally.
• Controlling and monitoring: This involves controlling the
financial resources of the organisation and monitoring the
implementation of the organisation’s financial plan.
 Financial management value
creation process
Figure 1.2 The financial management value creation process
 Create long-term shareholder
value
• A focus on the core business and customers of the
organisation.
• The recognition and management of all capital inputs
into the business, not just financial capital.
• The management of the impact and cost of the
organisation’s activities on its broader environment.
• The acknowledgement of the responsibility for ensuring
sustainable development of the environment in which it
operates.
• The balancing of the interests of key stakeholders in the
distribution of the organisation’s value and resources.
 Financial Management
Decisions

Figure 1.3 Chapters in the textbook that focus on each financial management
decision
 Academic Knowledge Areas

Figure 1.5 Key areas of academic knowledge and information required for
effective financial management
 Internal Environment
• Corporate Governance
• Structure of Organisation
• Sole Proprietorship
• Partnership
• Companies
 External Environment
• The economy
• Inflation and interest rates
• Labour relations
• Tax system
• Financial markets
• Legal context
• The Companies Act
• The Competition Act
 Concluding remarks &
Questions
• The purpose of this chapter has been to introduce
financial management as a distinct subject area.
• You should understand the nature of financial
management, the decisions that financial management
practitioners make to manage an organisation’s financial
capital and the objectives or goals that guide financial
management practitioners in this process.
• Financial management is the effective and efficient
management of an organisation’s financial capital and
resources in a way that assists the organisation to
achieve its goals, strategy and objectives.
 Concluding remarks &
Questions
• The decisions and goals of the financial management
practitioner therefore depend largely on the
organisation’s strategy and objectives.
• Question: Can a successful company generate sustained
organic growth without sustained good financial decision
making? Motivate your answer.